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What Goes Up Must Come Down – Sooner Or Later

There’s light at the end of the tunnel. That’s the news flash. By now you probably know that the City has published the Tentative Assessment Roll for fiscal 2011 which raises the property tax valuation for lots of buildings. But even (or maybe especially) the way this sui generis system works, what goes up must come down.  Here’s what I mean.

 Right about now, you’re probably asking: how can my assessed property value be going up when my apartment has gone down in value 20%? It’s a good question.  I’d be asking it myself – except I already have.

 I know it’s counterintuitive, but here’s what you have to understand.  The value of your co-op or condo has nothing to do with how much you pay in real estate tax. The price of your two bedroom could go up, down, or sideways. I’m sure it matters to you, but not to the tax man. You have to throw logic out the window to figure out the system.

According to the FY11 Assessment Roll, overall assessed values for co-ops and condos throughout the City increased about 5%. If you dig deeper, you’ll see the numbers are all over the lot (which, of course. is why there are averages). My building’s assessed value went down — by quite a lot. (Hallelujah!)

 Anyway that’s only the beginning of the story because the tax you pay isn’t even based on the assessed values that have just rolled off the presses for FY11, but on what’s called a transitional value, that takes into account values over the past five years.

But I digress.  The reason your real estate tax value can go up, even as the price of your apartment is going down, is that assessed values are based on RENTS. In theory, co-ops and condos are valued as if they were rental properties by determining their rental income and then projecting a rate of return.  That’s ridiculous, you’re probably saying, but in this market rents have gone down so my building’s assessment still should have gone down along with them.

Would that it were so simple, only it’s not.  Yes, market-rate rents have gone down, but stabilized rents have gone UP (they always do).  So, in theory, if you live in an established building with no remaining stabilized tenants, only market-rate rents are relevant and logically the assessed value would go down.  And if you live in a more recently converted building, the higher the number of stabilized tenants the greater the impact their rent hikes would have on the assessed value.

Still with me? – cause it gets more complicated.  The rental data used by the City Fathers to calculate property values for FY11 is from calendar 2008 – before the real brunt of the crash was felt, which could help explain why assessed values went up even in established co-ops and condos that are 100% owner occupied, where only declining market rate rents should be relevant.

But that’s not the end of the illogic. Not only is the data used potentially stale, but it is different for each building.  Rather than use a broad-based sample that is city or even borough-wide, the powers that be pluck a few supposed comparables from an unknown universe for each building.

The result is a hodgepodge that makes it impossible to predict property assessments with any certainty, which wreaks havoc in building boardrooms at budget time, and gives owners agita.

That is the long answer to the short question why your assessed property value went up even though the price of your apartment went down.

But as you’ve probably figured out, there’s a lag time built into the system because property values for FY2011 are based on calendar 2008 rents. This means, all things being equal, that assessed values should start coming down as post-crash rental data finds its way into the City’s computers. I know it’s too early to break out the champagne, but relief may be on the not-too-distant way.

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